Brazil's Corruption Investigation Spreads to IPG's Lowe

Brazil's massive ongoing corruption investigation, called Operation Car Wash, has reached the ad industry. A former executive at Lowe & Partners' Brazilian agency, Borghi/Lowe, was detained by police last Friday and a federal judge authorized the agency's financial and other records to be searched, reported Meio & Mensagem, Ad Age's editorial partner in Brazil.

Judge Sergio Moro of Brazil Credit: SIPA via AP Images

Ricardo Hoffman, Borghi/Lowe's former VP and head of the agency's office in the nation's capital Brasilia, is said by Federal judge Sergio Moro, who heads the Operation Car Wash investigation, to have instructed third parties to make payments to then-Congressman Andre Vargas in connection with two government accounts handled by Borghi/Lowe. Mr. Vargas and his brother Leon Vargas and another former congressman were also detained by police on Friday, Meio & Mensagem's Felipe Turlao reported.

Until now, Operation Car Wash's focus has been on a huge price-fixing scandal shaking Brazil in which Brazilian construction companies and other suppliers are said to have vastly over-charged state-controlled oil giant Petrobras, bribed Petrobras executives, and funneled money to politicians. (One Petrobras executive-turned-witness has agreed to return $100 million he took in bribes over the years).

But now that an ad agency has been drawn into the investigation, it is likely that investigators will take a closer look at all government advertising accounts, Brazilian media reported on Monday.

Lowe parent Interpublic Group of Cos. had already cracked down on Borghi/Lowe in Brazil. IPG said in a statement provided to Ad Age today: ""As a result of its own investigation, IPG had previously taken a number of remedial and disciplinary actions in connection with this matter. We will undertake additional steps as necessary to fully address the issue. We are working closely with our local agency, which is actively cooperating with Brazilian law enforcement."

Mr. Moro said in a report "The facts characterize crimes of corruption, with commissions owed to Borghi/Lowe, the ad agency hired by public entities, being directed as payoffs and without a legitimate reason to Andre Vargas and his brothers by fraudulent means."

In Brazil, ad agencies customarily—and legally--collect bonuses or rebates based on volume from media. This practice often extends unofficially to other suppliers including production companies. Media agencies don't exist in Brazil, because media commissions and volume-based bonuses can only be paid to full-service ad agencies. In this case, the former Borghi/Lowe exec is said to have instructed five local production companies that worked on the agency's state-owned bank Caixa Economica Federal and Ministry of Health accounts to pay the volume bonus or rebate to the politician Andre Vargas' two shell companies. If Borghi/Lowe didn't customarily take a volume rebate from production companies, that would have created a potential pool of money that could be extracted and diverted without being missed or sending up red flags at the agency.

Mr. Moro continued in his report: "Borghi/Lowe, which administers the advertising accounts of public entities such as the Caixa Economica Federal and the Ministry of Health, contracted the services of [five production companies] to carry out advertising services for these public companies, and told them to make commission payments of volume bonuses to the companies Limiar and LSI, controlled by Andre Vargas and his brothers."

In a statement issued by Lowe & Partners headquarters in London, the agency said: "Last Friday, in connection to an ongoing investigation, we were notified that a former employee of our agency in Brazil is being questioned by authorities. We are working closely with Borghi/Lowe and are actively cooperating with law enforcement in this process, and will continue to do so together."

Borghi/Lowe told Meio & Mensagem that Mr. Hoffman left the agency at the end of 2014. In March, another exec, Andre Gomes, was promoted to VP and put in charge of the Brasilia office.

Mr. Moro also authorized a search of Borghi/Lowe's Brasilia and Sao Paulo offices, and access to the agency's financial and other records, as well as the records of the five production companies.

Jose Borghi, chairman of Borghi/Lowe, sent a statement to Meio & Mensagem on Wednesday denying any involvement in the payoffs. He said "I learned from the media about the declarations ex-employee Ricardo Hoffman made to the Federal Police in which he cites my supposed involvement in dealings by him with ex-deputy Andre Vargas or his companies. In relation to this, I inform that I never knew or had contact with the ex-deputy or anyone linked to his businesses."

The investigation is called "Operation Car Wash" (or "Operacao Lava Jato" in Portuguese) because it initially focused on money-laundering at Petrobras gas stations, where there are often car washes, before it became clear that the corruption at the oil giant was on a vastly larger scale.